Saturday, July 18, 2009

How to Cut Interest Rates to Below Zero

An interesting thought from Greg Mankiw, Economics professor at Harvard:

Why can't the Fed cut interest rates to below zero? Why can't the Fed announce, for example, an interest rate of negative 2 percent? You borrow $100 today and repay $98 a year from now. A negative interest rate would certainly encourage people to borrow and spend, thereby expanding aggregate demand. [...]

The problem, you might reply, is that no one would lend money on those terms. Rather than lending at a negative interest rate, you could hold onto cash by, for example, stuffing it in your mattress. [...]

With this background, I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

About Me

Gabor Cselle
San Francisco, CA

I'm a Group Product Manager at Twitter, which acquired our startup Namo Media in June 2014. Before Namo, I was a Product Manager at Google working on Google Now, Android and Gmail. I started reMail, a mobile email startup which was acquired by Google in February 2010.

Before reMail, I was the VP Engineering at Xobni, where we invented a popular plugin for Outlook, and a Software Engineer at Google. I have an MS degree in Computer Science from ETH Zurich in Switzerland.